The Denver Post BUSINESS
A new strategic plan can set even an old company on a high-growth trajectory.
By Gary Miller / GEM STRATEGY MANAGEMENT | February 19, 2017 at 12:01 am
I recently visited the owner of a family business whose revenue growth had stalled over the past three years and his earnings had declined as well. Facing significant financial pressure from increased operating expenses and cost of goods, the decline of his net income was projected to accelerate over the next two years. He was discouraged. He asked us to help him stabilize the company so he and his family could maintain their lifestyle.
In analyzing his company’s operations, we focused on five areas:
- Reducing expenses,
- Improving cash flow,
- Analyzing the company’s strengths, weaknesses, opportunities and threats (SWOTs),
- Assessing the company’s competitive position, and
- Developing strategies for growing the company.
After completing the company review, we sat down with him to discuss our findings. He was pleased with our in-depth analysis but reluctant to embrace new strategies. He feared that investing in new growth strategies, if not handled correctly, would further erode both cash and earnings. He wanted to play it safe and just stabilize the company so he and his family could live off the current earnings, even though they were shrinking annually.
We pointed out that a so-called safe strategy was neither safe nor a long-term solution. While his company was stalling, his competitors were stealing his customers. After several discussions, he asked us to show him that taking a chance on growing his company was safer than maintaining his current status.
The most important reason to grow a company is to create significant enterprise value (Enterprise Value, or EV, is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization.) to broaden the range of exit strategies for shareholders. The higher the EV, the more alternatives shareholders have for monetizing their investments.
Here are 10 additional reasons to grow a company.
- Market power: This gives large companies opportunities to establish larger geographic footprints to increase penetration. Expanding a geographic footprint builds scale and provides significant benefits to large companies. It drives credibility among all stakeholders, creates preferential treatment among suppliers and momentum to accelerate growth, stability to weather economic downturns, cost savings for company operations, competitive advantage, and financial strength to compete against larger competitors.
- Inventory power: This provides opportunities to purchase through master contracting with bulk purchasing and forward contracting that locks in costs of materials, labor and suppliers. A large company can employ just-in-time inventory strategies to increase efficiency and decrease waste by receiving goods only as they are needed in the production process. These strategies reduce inventory costs, improve cash flow and increase margins.
- Recruiting power: This gives large organizations greater access to higher-quality talent. Typically, higher-quality talent translates into more larger and higher-caliber clients. A company’s size creates the perceptions of success and, as a result, professional growth and opportunities for career advancement to its employees.
- Marketing power: This allows companies to command lower advertising rates due to media volume discounts in major traditional media. More media coverage provides more reach to the company’s target audiences, clients, and the investor community. It improves corporate image, reputation, brand name recognition and increases the brand power. Marketing power gives flexibility in developing new products and services to meet customers’ changing demands. It also offers opportunities for first mover advantage, which allows a company to be first in the market to capture share before other competitors can enter the market.
- Negotiating power: This helps organizations attract, recruit and retain higher-caliber clients. Large corporations, generally, have less client turnover and more new client acquisitions. Generally, the cost of attracting new clients is lower for large companies.
- Cost reduction power: This provides larger organizations to scale to optimum efficiencies. Operating expenses can be reduced. Policies, practice,s and procedures can be standardized to reduce management inefficiencies. Cost reduction power allows large corporations to substitute technology for labor intensive tasks.
- Technology power: This provides the ability to leverage hardware and software technologies to maximize growth, operations, earnings and competitive advantage. Technology power gives opportunities to create intellectual property as a result of developing new proprietary processes and software.
- Synergy power: This creates opportunities to meet customer needs through other related enterprises. It offers a holistic approach with a comprehensive portfolio of products and services that can touch clients multiple times throughout customer life cycles. Therefore, building repeat business is easier. It also creates strong brand loyalty and elongates customer life cycles.
- Competitive advantage power: This allows a company to scale operations, which leads to critical mass. Critical mass is the point at which the company no longer requires outside investment — of money, resources, or human capital — to continue being viable, to continue growing by itself. This leverage can accelerate growth, earnings, cost reductions, operations excellence and a solid, safe and secure work environment. Competitive advantage raises the barriers to market entry from potential newcomers and pressures smaller competitors who are not performing well.
- Earning power: This allows large-scale organizations to earn more for all stakeholders because scale and critical mass can produce increased growth, synergies, and resources at lower costs. Therefore, margins are increased and earnings are improved while operating expense rates are lower. More earnings produce financial stability, flexibility and the ability to take advantage of investment and acquisition opportunities.
Finally, a major benefit for larger corporations is that its bottom lines are larger, providing increased shareholder value. While the firm maximizes its profits, investors can maximize their returns.
After building a compelling case for growing his company, we persuaded the owner to re-examine his company’s strategic plan. He has set a new course for growth to increase his company’s enterprise value and expand his exit plan alternatives.
Gary Miller is the CEO of GEM Strategy Management, Inc., an M&A consulting firm, advising middle-market private business owners prepare to raise capital, sell their businesses or buy companies. He is a sought-after business consultant and speaker on M&A issues, strategic business planning, business valuations, exit planning, what buyers are looking for in acquisitions and how to prepare for due diligence. He can be reached at 970-390-4441 or firstname.lastname@example.org.